lecture 2

Question 1

draw graph showing;
- supply curve
- demand curve
- equilibrium
- producer surplus
- consumer suprlus
- total surplus

Answer 1

suppy curve = quantitiy increases, price increases
demand curve= quantity increases, price decreases
Equilibrium = where supply meets demand
CS = nearest the demand curve (upper triangle)
PS = nearest the supply curve (lower triangle )
total surplus = CS + PS (big traingle)

Question 2

what exactly does the consumer surplus show?

Answer 2

the difference between what consuemrs are willing to pay vs what they actually pay (determined by the equilibrium)

if ur willing to pay 100, but pay 80 - the surplus is 20

Question 3

the difference between what consumers are willing to pay vs what they actually pay is called what?

Answer 3

consumer surplus

Question 4

What does the producer surplus show us?

Answer 4

the difference between the lower price the producer is willing to sell for vs the price they actually sell for, as determined by the equilibrium
- aka ‘extra’ profit that they make

Question 5

What do both the producer and consumer surplus show us?

is this a type of efficiency?

Answer 5

both consumers and producers benefit from the market indicating a win-win situation

• it is pareto efficient since nobody can be made any more better off without making someone else worse off

(if youd lower the prices, consumers would be happy and their surplus would increase, but producers would be unhappy and their surlpus would decrease)

Question 6

a market equilibrium can be partial or general. what does this mean?

Answer 6

a) partial = the market only focuses on one market (ex. bread)
b) general = looks at the market as a whole (aka many markets + how they interact ex. bread, milk, wheat) this shows us interdependencies across the whole economy ex. how does increasing the price of milk influence the bread market?

Question 7

what is a partial market equilibrium

Answer 7

• when you find where supply = demand on a specific market (ex. bread market)

Question 8

what is a general market equilibrium

Answer 8

a general market equillibrium analyzes all market simoultaneously (ex. bread, eggs, wheat)

• it tries to find one big equilibrium that works for ALL markets analyzed
• assesses how the dif markets are interdependent to each other, and the increase or price of one product influences the price of a second product
• more prominent in macroeconomics

Question 9

does a general or partial market equilibrium assess multiple different markets to see how they are interdependant to each other and ones price increase influences anothers price?

Answer 9

the general price equilibirum
- it aims to find one big equilibrium across all the markets assessed

Question 10

How does a shift in equilibrium occur?

Answer 10

• societal change ex. new tech can change in consumer preferences (ex. electric cars)
• this changes number of buyers and sellers which shifts the demand and supply curve
• this creates a new equilibrium which indicates the new optimal (pareto efficient) price and quantity

Question 11

• which way does the curve shift if demand increases?
• which way does the curve shift if demand decreases?
• draw it

Answer 11

• if demand decreases - shifts left
• ## if demand increases - d curve shifts right

Question 12

how does supply curve shift if supply increases or decreases?

Answer 12

• if s curve increases = up
• ## if s curve decreases = down

Question 13

what are 4 reasons why demand curve can shift up and increase

Answer 13

• income distribution change
• consumer preferences changed (ex. tech developements)
• the price of a different good changed which impacted this good
• NUMBER OF CONSUMERS CHANGE

Question 14

What are some reasons for why supply curve can change?

Answer 14

• NUMBER OF PRODUCERS CHANGES
• price of certain production factors change
• tech changes

Question 15

graph when price is not at the equilibrium and the impact this has on producer + consumer suprlus (+show dead weight loss)

Question 16

homogenous vs heterogenous goods

Answer 16

• homogenous = same
• heterogenous = dif

Question 18

if many consumers and many suppliers - what type of market is this (for heterogenous goods + homogenous goods)?

Answer 18

homogenous goods (goods that r the same) = perfect competition

heterogenous goods (goods that are dif) = monopolistic competition

Question 19

if many consumers, many producers, and homogenous goods - what type of market?

Answer 19

perfect competition

Question 20

if many consumers, many producers, and heterogenous goods - what type of market?

Answer 20

monopolistic competition

Question 21

if many consumers but few suppliers - what type of market for homogenous and hetergenous goods?

Answer 21

OLIGOPOLY

homogenous goods = homogenous oligopoly
heterogenous goods = heterogenous oligopoly

Question 22

if many consumers and one supplier - what type of market?

Answer 22

MONOPOLY

Question 23

WHAT IS A MONOPOLY

Answer 23

when there is one supplier and many consumers
- this means there is no competition for the supplier, they are the only one supplying this product
- this means instead of being a price taker (as they would be in perfect competition bc the price is influenced by natural supply and demand of the market) they are a price setter (because they have the power to determine their own price since ppl will utimately buy the products anyway (since nobody else supplies them)

Question 24

3 types of monopolies

Answer 24

1. natural monopoly
2. technical monopoly
3. legal monopoly

Question 25

technical monopoly

Answer 25

a technical monopoly occurs when one company has exclusive control over a specific input (resource) required to produce a product, or has a specific technological advantage that other companies cannot replicate ex. natural gas

Question 26

natural monopoly

Answer 26

when it makes more economic sense for only one company to supply a product, as opposed to having many suppliers this occurs when there is a SUPER HIGH fixed cost, and a LOW variable cost - thus multiple companies would mean MULTIPLE HIGH FIXED COSTS, meaning the overall product would be RLY EXPENSIVE = INEFFICIENT. Whilst having only one company means having only one fixed cost, which means the more people purchase from that company, the more money is made (fixed cost 'decreases' bc its covered) = THEREFORE WITH ONE COMPANY AVERAGE TOTAL COST IS LOWER example; - waterpipe system

Question 27

what is one advantage and one disadvantage of a natural monopoly?

Answer 27

one advantage is that having only one supplier means the average total cost is lower, this is bc of the economies of scale effect - high fixed costs means that the more people purchase the product, the lower the marginal costs are - thus the more ppl that use it the cheaper the product is which is inherently more efficient one disadvantage is that the supplier has no competition which means they could in theory become a price setter and determine the price and quantity produced themselves for personal gain at the expense of consumers = this is why such products are regulated by the government

Question 28

legal monopoly

Answer 28

when the government grants a company exclusive rights to be the sole producer of a product, this is done through; a) concessions = exclusive license to operate in a region b) patents = legal protection for inventions its enforced by law + can be temporary ex. company gets legal right to be the sole explorer for natural oils in a country

Question 29

in perfect competition, MR = AR = Price, BUT in monopoly MR is NOT equal to AR - why? graph this

Answer 29

- monopolist is a price setter - n monopoly monopolist cant choose price + quantity independently - to sel MORE it has to LOWER the price on ALL units - so MARIGNAL REVENUE will be LOWER than the price so AR = P MR < P

Question 30

what is rent seeking

Answer 30

when powerful actors use their power to influence regulation to make more money (regulatory failure) in the context of monopolies its when = monopolies waste money to stay monopolies - instead of improving their products (ex. lobbying for laws that protect monopolies)

Question 31

what is x inefficiency

Answer 31

when firms waste money in an inefficient way but dont care because they have no competition so no need to care

Question 32

what is dynamic inefficiency

Answer 32

in competitive markets, firms have to innovate to stay ahead - which is incentivized via competition. if no competition, no need to stay ahead, no tech advancements

Question 33

does less competition mean more or less DWL

Answer 33

less competition = bigger DWL more competition = less DWL = efficiency = higher total welfare

Question 34

under EU law, is competition an end goal?

Answer 34

NO under EU law, competition is a tool used to get to the end goal which is to promote economic welfare

Question 35

what is oligopoly 2 types?

Answer 35

a market where there are many consumers, but only few producers 2 types; a) homogenous oligopoly = same products (consumers dont care abt brand or company bc the product is always the same) b) heterogenous oligopoly = dif products (consumers care abt brand + company bc product is slightly dif)

Question 36

is there one clear equivocal (clear / explicit / defined) theory on oligopolies?

Answer 36

NO - firms watch each other and react to each other strategically as their behaviour largely varies so thers no theory - they are a bit unpredictable sometimes they compete, sometimes they cooporate, sometimes they form cartels (fix prices illegally), sometimes they aggressively undercut each other

Question 37

what is a duopoly

Answer 37

a type of oligopoly where there are only 2 firms as producers, and many consumers

Question 38

how do duopolies avoid competition?

Answer 38

they are interdependant on each other. whatever one company does, the other company will do too for example; - if company A lowers production (q) but increases price to and the other does the same = they both make more profit - if one lowers price, the other will do the same = this can start a price war, there is a con that at a certain point they might both start losing money = inefficient SO they dont compete in 'traditional ways'

Question 39

SO how do duopolies compete? give an example

Answer 39

a) product differentiation - MAKE THEIR product seem special ex. cocacola creating cocacola light and cocacola zero - essentially the same product divided to cover 2 dif demographics (light advertized to women, zero advertized to men) ex. energy sectors = 'green b) marketing and ads c) control over WHERE the product is sold (ensuring avialaibiity in stores, that it gets enough shelf space, etc.)

Question 40

how does coordination occur in oligopolies?

Answer 40

1) cartel agreement 2) merger /takeover/ joint venture

Question 41

what is a cartel (one form of oligopoly coordination)

Answer 41

= illegal agreement where firms agree to set prices in oligopoly, when 2 firms join a cartel they start to act like a monopoly ex. airfrance and klm had cartel agreement w/ 11 other airlines to fix prices for air cargo, this reduced competition, they were fined 340 mil euros by eu comission bc lufthansa airlines snitched

Question 42

what is a merger = formal cooperation

Question 43

why do cartels in oligopolies often fail without any intervention?

Answer 43

a) free riding issue (participants cheat and make more money than agreed on) b) collective action problem = its hard to enforce agreements (cartels) in large groups - mostly just works in small groups c) high cartel profits attract new competitiors, often cartels agree to keep prices high so new ocmpetitiors enter market and keep prices low, this increases supply and the cartel collapses

Question 44

monopolistic competition

Answer 44

many consumers + many suppliers but they are producing and supplying heterogenous products (products different to each other) a. a monopolistic structure occurs bc each product is a little unique so each company has some say over the price, mostly based on design and functionality - so each product has its own 'sub market' B. BUT this is welfare increasing compared to monopolies bc consumers STILL HAVE A CHOICE + excess profit incentivizes firms to innovate more

Question 45

short term monopolistic competition

Question 46

long term monopolistic competition